Playing Defense in the Lumber Market
Historic Lumber Run Continues as Market Heats Up Even More on Increased Seasonal Demand
Coming out of 2017, the lumber and building industries were certainly hoping for a calmer, more stable tone when we turned the page to a new year. It is safe to say that we were eager to put all the “drama” behind us and settle into more of a traditional, cyclical pattern of wood supply and demand dynamics. Well, if 2017 frazzled your nerves, you are probably already exhausted from the constant barrage of price escalation chatter besieging you so far in 2018. It has been an unprecedented start to the year. Contract Lumber’s Commodity Lumber Price Index (CLPI) logged gains in 14 of the first 18 weeks of 2018. Historically, first quarter is relatively quiet in the lumber business, with minor swings possible in either direction. But the 2018 lumber market has not followed any historical pattern. The potency of the market has caught nearly everyone off-guard, lumber buyers, and their building customers alike, leaving us all playing defense in the lumber market.
For perspective, let’s take a look back at the lumber market for the last two years in order to get a recent baseline using our CLPI. The average price of our index in 2016 was $314.65. The high in ’16 was recorded in mid-August at $350.76, while the low of $267.04 posted in late January, a swing of 31%. In 2017, the average of our composite index was $390.49, a 24% increase above the average in ’16. The high last year was $438.56, posted in mid-October. The low in 2017 was logged in late-January at $319.62, an increase of 37% from low to high. Volatility was once again creeping back into the lumber market and our cautioning of higher highs and higher lows, was coming to fruition. Of course, housing starts were steadily increasing in both 2016 (1.174 million) and 2017 (1.192 million). Demand was increasing and many were questioning whether the supply-side had geared up their capabilities accordingly. But 2017 did not allow the true balance between supply and demand to play out. Politics and natural disasters disrupted any natural equilibrium within the lumber trading system and we were left with gyrations in lumber prices that we hadn’t seen in a long, long time. Everyone was looking to first quarter 2018 as an opportunity to catch our collective breath. That was not to be the case.
So Much for Relief in the New Year
Wishful thinking does not always deliver intended results and so far in 2018, the calmer, more stable lumber market that we had all hoped for, has not materialized. In the first 18 weeks of the year, the CLPI has averaged $441.02, 13% above last year’s average of $390, and 20% higher than the same period in 2017. The current index stands at $484.07, besting the all-time high set back in 2005, and is 26% greater than where it began the year. The market is humming with no significant short-term relief in sight. Producers are firmly in command of the market, many extending their order files out well into late May and early June. While buyers were able to generate a little downward pressure during a few weeks in March, essentially by staying on the sidelines, the softening trend turned around quickly when distribution was forced to step in and replenish dwindling inventory levels. Since that turnaround, the market has been grinding higher as spring-like weather visits much of the country and jobsite activity becomes more robust. This past week it kicked into a whole different gear, posting the second highest one-week gain in a half decade. The spring surge is upon us and it is improbable to think lumber has any downside risk in the next 45-60 days. A record setting lumber futures market lends credence to that rational.
Product Drill Down
Now, more than any time in the lumber business, specific products move independent of each other. Producing regions often have unique circumstances. Individual species can have exceptional conditions. The point is, products move less in “sympathy” with each other than they ever have. It has become increasingly more difficult to pull trends and gauge the direction lumber prices may be heading. The system has become more complex. Our composite index (CLPI) is designed as a tool to help readers better absorb what has, and is happening in the lumber market. It is impossible to encompass all product scenarios given the wide-range of geography we cover, and the construction tendencies of individual markets. That’s why we concentrate more in percentages of movement than we do actual reported numbers, which do not even factor in freight. The CLPI is merely a tool to help us all evaluate the market more effectively. I view other lumber price reporting services as tools, as well. It’s important to note that no one has ever bought a stick of lumber from a lumber reporting agency. They compile and regurgitate price information, and while they are certainly helpful instruments, they are not always reporting “real-time” lumber pricing.
With that said, there are several individual lumber products in our index that deserve special attention. The southern pine market is on fire right now…no, not literally, thank goodness. SYP was a value much of last year but has built momentum since January. Buyers switching from record high price levels in western SPF, along with truss and treating manufacturers stepping up their purchases, have breathed life into this market. To compound the issue, trucking out of the south is experiencing its typical spring challenges, when many haulers opt for more profitable fruit and vegetable runs. Southern pine has bumped up an average of 30% across all widths, with 4-inch particularly hot. The SYP market has some legs.
Studs have also been on a run, increasing $95, or 29% since the first of the year. Both 8 and 9-foot trims have shown strength with 2 x 4 garnering more interest than 2 x 6 so far. Western Spruce (SPF) continues to climb, especially in the narrows. Limited availability amid major shipping frustrations has pushed 4” and 6” to record levels. The tempo of trading in the Eastern SPF market has intensified as well, with frantic buyers seeking alternatives for western markets.
The oriented strand board market has been equally stout after a correction back in November. A market that many thought could soften in the first quarter due to new production slated to come on line, did anything but. In two months’ time, starting the first week of January, three-quarter inch T&G soared $125 (27%), to $590 as reported in the northcentral region. During that same time, seven-sixteenth OSB sheathing gained $100, (33%). After the early year surge, the “sneaky strong” OSB market leveled off until a $5 bump last week. The southeast and southwest OSB regions have been slightly stronger, especially in 7/16” sheathing.
What is driving this market?
When looking at indicators to try and understand why this has been such a bull market in a traditionally docile time of the year, demand is always the first stop. Demand for lumber has been solid, especially given the lingering winter weather that much of the country experienced. U.S. housing starts increased to a 1.32 million seasonally adjusted annual rate (SAAR) through March, with multifamily activity especially strong during the first quarter. But demand doesn’t tell the whole story. One of the biggest story lines all winter has been the shipping disruptions that have wreaked havoc on the lumber market. Rail traffic has been exceptionally frustrating with car shortages, lost and misrouted cars, lack of service to lower-velocity lines, and cars stuck in reloads centers and rail yards for weeks without moving. These railcar transportation struggles have delayed deliveries up to two months, putting significant pressure on the entire supply chain. Buildup of sold inventory at the mills has caused many to limit production because they simply ran out of room to store wood. And buyers, waiting on late shipments, were forced back out into a rising market to cover needs they had already purchased. Both of these scenarios helped fuel the market. To add insult to injury, now rail lines are raising shipping rates for their suspect services.
In addition to the logistical chaos in rail transportation, over-the-road trucking is offering its own brand of exasperation to the lumber distribution network. The electronic logging device (ELD) mandate that went into effect in December, is greatly hampering trucking productivity, with nearly 70% of drivers reporting that they are driving fewer miles, and taking more time to do it. Just glance into the next roadside rest you pass and you will see a multitude of parked trucks, forced to take rest time due to mileage and hours of operation constraints. And regulations aren’t the only issue facing the trucking industry. There is a shortage of drivers and equipment, especially flatbed carriers, the hauler of choice for the lumber industry. According to a report published by Advantage Forest Products Group, the national average load-to-truck ratio is an incredible 109 loads per available flatbed truck. That kind of imbalance is forcing healthy increases in shipping costs and making it nearly impossible to get prompt load delivery.
It’s Not Just Lumber
Aside from commodity framing lumber products, many other building materials are also seeing increases, including engineered wood products, drywall, concrete, steel, composite sidings and trim, fasteners, hardware, roofing, to name just a few. Its obvious builders are getting hit from all directions on the material side, and we haven’t even mentioned the escalation of labor costs. On the positive side, builders are getting more for their product. Home prices are accelerating at a 6.7% clip so far in 2018, a slightly higher rate than in the past few years. The concern becomes, at what level do we reach the breaking point, where elevated home prices chase away potential buyers. That number still seems to be well off in the distance according to NAHB chief economist, Robert Dietz. He predicts that the U.S. will build about 900,000 single-family homes this year – whereas 1.2 million are needed to keep up with the demand from those hoping to purchase a new home of their own. Housing demand is strong and with the homeownership rate (36%) growing in the millennial demographic, the future looks bright, especially for single-family new home construction.
The Balancing Act
Life in the building industry is essentially about balancing the good news and bad news that surrounds the construction business. If you get bogged down with all the negative, it can be hard to keep your confidence level and energy up to forge forward, which is exactly what successful builder’s do – forge forward. Yes, there will always be headwinds to negotiate when building the American dream, and sometimes they will be formidable. Currently, we are experiencing only a stiff breeze of resistance. There are way too many positive vibes in the construction world right now to let the engine sputter due to some pessimistic chatter. It is but another challenge to overcome – something builders, and all those who toil in the construction industry, are quite used to. Yes, we are quite adept at playing a little defense. And, rest assured, the day will come when we will get possession of the ball again.